A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Holub, Roksolana; Hlushchenko, Oleksandr Article The National Bank of Ukraine communication strategy optimization within the framework of impact on exchange rate expectations of economic agents Economies Provided in Cooperation with: MDPI – Multidisciplinary Digital Publishing Institute, Basel Suggested Citation: Holub, Roksolana; Hlushchenko, Oleksandr (2017) : The National Bank of Ukraine communication strategy optimization within the framework of impact on exchange rate expectations of economic agents, Economies, ISSN 2227-7099, MDPI, Basel, Vol. 5, Iss. 3, pp. 1-15, http://dx.doi.org/10.3390/economies5030033 This Version is available at: http://hdl.handle.net/10419/197034 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. 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Academic Editor: Ralf Fendel Received: 4 April 2017; Accepted: 26 July 2017; Published: 4 September 2017 Abstract: An important challenge in terms of smoothing excessive exchange rate volatility under the conditions of flexible exchange rate arrangement is optimization of the communication strategy of the country’s monetary regulator. Over the past two decades, communication (information support) has become an increasingly important aspect of monetary policy. Communication enables influence of the volatility of financial markets, improvement of the predictability of monetary policy, and helps to achieve macroeconomic objectives. Nevertheless, as of today, consensus on the issue into what the optimal strategy of the central bank communication is has not been reached, either in Ukraine, nor in developed countries yet. Considering the abovementioned, the methodical approaches to improve the central bank’s communication strategies, based on the use of its verbal interventions in the context of smoothing out excessive cyclical volatility of exchange rates of the national currency, are determined in this article. It is suggested to consider the growth of the factor “information signal/information noise” as a criterion of the central bank’s optimal communication strategy. It is proved that the monetary regulator’s main task should be the continual provision of information concerning a fundamentally justified level of the exchange rate and the level of deviation of the actual rate of the national currency from its fundamental-equilibrium level, as of a given time, to the national foreign exchange market participants. The methodological approach to the improvement of information support of forecasting fundamentally specified value of the national currency is outlined. Keywords: exchange rate expectations; communication; verbal intervention; devaluation; revaluation; fundamental value JEL Classification: E52; E58; F31; G18 1. Introduction The study of factors of exchange rate dynamics of national monetary units, along with strengthening and rapid development of globalization processes, has increased in recent decades. Crises that periodically occur in national monetary and financial systems as a result of the joint influence of external and internal factors cause complex regulatory challenges in the context of maintaining macroeconomic balance under conditions of unstable and quickly changing external and internal environments. As of now, all classical, neo-classical, and more modern, dynamic, stochastic exchange rates models are derived by reference to the efficient markets hypothesis. The main drawback of this is that it is based on the assumption of the absolute rationality of economic agents. However, since the 1980s, the theory of rational expectations and efficient markets has been the subject of academic Economies 2017, 5, 33; doi:10.3390/economies5030033 www.mdpi.com/journal/economies Economies 2017, 5, 33 2 of 15 criticism from Robert Schiller—the founder of the theory of behavioral finance—who was awarded the Nobel Prize in economics in 2013 for a significant contribution to the study of irrational behavioral aspects of financial markets. There are four preconditions, whose presence adds extra significance to the communications strategy of the central bank: - Transiency (continuous, rapid, non-linear changes, both in the economy and in politics, and in the country and in foreign markets); - Training (adaptation, adaptability, reactive, and proactive actions necessary to preserve the integrity of the national economic system in a turbulent global environment; training of economic agents and market participants standardizes and rationalizes their perception of the central bank’s communication signals, and thus makes the markets more efficient); - Irrational expectations and behavior (different participants react to the same signals through the prism of individual perception, i.e., differently); - Asymmetrical awareness among economic agents and the central bank. If one or more of these four abovementioned preconditions exist, central bank communication is essential. Note that all four preconditions exist in Ukraine. In this article, we want to clear up the nature and suggest ways to improve the communication strategy of the national monetary regulator in the context of influence on monetary and exchange rate expectations and behavior of economic agents. Equally important is the need, which the article is aimed at addressing, of methodical approaches to forecasting the fundamental value of the national currency (UAH) in terms of Ukraine’s price competitiveness on the markets of goods, services, and financial assets. According to the above-mentioned, we suggest the model of forecasting the UAH exchange rate with regard to the impact of external, internal, and combined (including behavioral) factors. 2. Literature Review Prior to the 1990s, the managerial tradition of “the initiated elite” dominated among central banks of developed countries. The essence of it was to ensure that monetary policy strategists should say as little as possible and say it cryptically to support the general idea of the complexity and impossibility to formulate monetary policy ideas in accurate and clear words and sentences (Brunner 1981). Today, diametrically opposed management behaviors of central banks have become dominant. There exists clear awareness of the role of behavioral factors in generating long-term cycles in the financial assets markets and, therefore, understanding of the fact that greater openness might actually improve the efficiency of the monetary policy. A more open central bank creates expectations by providing the markets with more detailed, available, and understandable information about its own view of the fundamental factors that influence monetary policy in general and exchange rates in particular. Becoming more predictable for the markets, the central bank, in fact, forms their reaction to its monetary policy. This makes it possible to improve the management of the national economy. Thus, the art of managing expectations is becoming an essential characteristic of the central bank’s communication strategy now (Woodford 2001). Long-term expectations are formed by fundamental indicators of development of various sectors of the national economy. But the perception of these indicators by different market participants may differ significantly from completely rational, being under the influence of differences in education, psychology, or risk aversion etc. Individual peculiarities of the perception of macro-level financial and economic data overlap collective behavioral aspects. The most well-known of these include the self-fulfilling forecast, also known as the theory of reflexivity (Merton 1948; Soros 1999). It is necessary to emphasize the presence of permanent bilateral (reflexive) connections between the cause and effect, and between the expectations and behavior of those who are expecting. Economies 2017, 5, 33 3 of 15 Events influence each other and can also reproduce themselves. Ideal examples of reflexivity are financial “soap bubbles”, as well as panics and crashes (Minsky 1986; Kindleberger and Aliber 2005). Excessive volatility in the foreign exchange and other types of